In a significant victory for India’s financial markets, the Supreme Court has quashed a ₹80 lakh penalty levied on the country’s two primary stock exchanges and the Securities and Exchange Board of India (SEBI) by the Bombay High Court. The penalty arose from the erroneous freezing of demat accounts belonging to Dr. Pradeep Mehta and his son, Neil Pradeep Mehta, who were mistakenly categorized as promoters.
The Supreme Court, led by Chief Justice DY Chandrachud, found that the Bombay High Court had made a crucial error in its judgment. The Court observed that the High Court had issued a final judgment while the case was still under consideration for interim relief. Furthermore, the penalty was imposed without providing an opportunity for the market bodies to present their side of the story.
In response to the Supreme Court’s findings, the Bombay High Court has been directed to rehear the case and deliver a fresh judgment, ensuring that all parties involved are given a fair hearing.
The origin of this case lies in the actions of SEBI, which froze the demat accounts of Dr. Mehta and his son based on directives aimed at promoters of Shrenuj & Company Ltd. Shrenuj had failed to submit its financial results and comply with SEBI’s Listing Obligations and Disclosure Requirements Regulations. The freezing of their accounts affected not only their holdings in Shrenuj but also their shares in ITC Ltd.
Dr. Mehta challenged the freezing of his accounts, arguing that he had no involvement in the management of Shrenuj and was only a minority shareholder. He also pointed out that his son, Neil, who was a minor residing in Singapore at the time, was unfairly impacted.
The Bombay High Court, acknowledging the severe impact on the Mehtas, ordered the immediate unfreezing of all their shares. The court deemed the freezing of demat accounts illegal, emphasizing that such actions without proper consideration could severely prejudice individuals and undermine the fundamental rights guaranteed by the Constitution.
The High Court also criticized SEBI for infringing on the petitioners’ rights and failing to conduct its actions in accordance with the law.
This case has brought to the forefront the question of whether SEBI should penalize the promoters of a listed company for compliance lapses by freezing their demat accounts. Legal experts have suggested that SEBI may need to revisit its regulations regarding the freezing of demat accounts to ensure that such actions are based on solid evidence and a fair process, balancing effective enforcement with procedural fairness. The Supreme Court’s ruling is a crucial step in ensuring a more balanced and just approach to regulating the financial markets in India.
